Intel INTC had a good-ish third quarter. I say good-ish because the company managed to continue growing its PC-related business despite what IDC and Gartner had to say about continued declines. It also saw IoT revenue grow strongly and one can hope that in the not-too-distant future (hopefully 2017), its next-generation memory chips will make it to market.
Data center revenue grew as well, but not as much as many were hoping. Drilling down further, it appears that enterprise remains the spoilsport while cloud is putting up a good fight to make up for this weakness.
Significantly, while all costs declined as a percentage of sales sequentially as well as from last year, R&D and engineering costs were down substantially. CEO Brian Krzanich expressed satisfaction about management’s ongoing restructuring program and said “We… continue to realign our resources to our strategy.” True enough, non-PC businesses contributed nearly 53% of operating profit while generating around 43% of revenue in the last quarter.
Intel shares are sliding today as guidance for the upcoming quarter missed the Street’s expectations.
Here are five things I picked from the announcement that will hold true for other technology players as well:
Earnings Beats May Not Mean Stock Appreciation
Investors this season have a lot of things on their minds what with the election coming up and the strong chances of a rate hike to follow soon thereafter. China growth concerns haven’t helped matters (GDP is steady at 6.7% for the third straight quarter, which is the lowest rate in 25 years, but experts are betting this too will drop as the government takes measures to control escalating real estate prices).
To top it all, the U.S. dollar continues to strengthen, reaching new highs just a couple of days ago. And as we all know, most tech companies sell a lot of stuff abroad so a stronger dollar just doesn’t help.
So this quarter, investors prefer a strong guidance to an earnings beat and shares of companies that fail on the former are going to be punished.
PC Inventory Buildup
Believe it or not, companies supplying into the PC (that includes laptops and hybrids) market could see some inventory accumulation and consequently, weaker sales in the current quarter. IDC mentioned that "Although we've now seen two consecutive quarters of strong market growth, we believe the strong market performance has less to do with strengthening demand and more to do with increased appetite from the channel for inventory" and, "We will need a strong holiday season to ensure that we don't enter 2017 in a poor inventory situation."
Check out what Intel says in explaining the below seasonal guidance for the client segment: “we expect the worldwide PC supply-chain to reduce the inventory.”
So the quarter is likely to see inventory corrections and some caution about spending on inventories that PC-exposed companies may experience.
Growth Is Where the Cloud Is
Intel management said that the cloud piece of its data center business grew 30%+ from the year-ago quarter compared to a 3% decline in the enterprise business. The enterprise softness is partly on account of companies moving their operations to the cloud. While this piece will remain a drag on results, it is expected to improve from the current position as some companies will be deploying private clouds.
In general, tech companies with a cloud focus, such as Amazon AMZN, Alphabet GOOGL and Salesforce CRM, or those that are in rapid transition to it such as Microsoft MSFT and Intel or those that are primarily involved with connected/computing devices like Apple AAPL or services like Netflix NFLX will be beneficiaries.
Realigning Costs with Strategic Priorities
This has become a common theme for a growing number of technology companies, particularly incumbents like Intel, Microsoft and Cisco CSCO over the past few years. These giants have implemented massive restructuring actions to adjust their products and revenue models with the reality of cloud computing. Efficient cost management if not total restructuring will remain important considerations for most players.
Conservatism All the Way
Irrespective of what investors may be asking for, companies too have headaches because of changing market conditions, fresh competition from niche players and market saturation such as in the case of PCs. Finding new use cases for their technology is another challenge. So companies are likely to guide conservatively.
Since there are a large number of growth stocks in the sector, multiples are often inflated. The rich valuation can be a deterrent to investment particularly since there is some uncertainty about the future payback of investments. But post earnings pullbacks may be just the way to get into a stock.
Many semiconductor, Internet retail or other Internet stocks are ripe for the buying. But choosing can be a risky business. So don’t leave it to chance: Simply pick from the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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